What will Fed say to new market records?

American markets are growing and setting new records. The S&P500 updated historical highs, and on Wednesday morning, futures for the index reached new highs, rising above 3397.80 for a few minutes.

In the last 17 trading days, the SPX closed with a decline only twice, reflecting the bullish impulse.

Touching historical highs officially confirmed that we witnessed the fastest ever recovery of the S&P500 from the bear market.

Nasdaq100 has set 18 historical highs since the beginning of June, as the IT giants included in it mostly benefited from the lockdown.

Elsewhere, strong reports from Walmart and Home Depot retailers supported the positive market dynamics yesterday. Their sales increased since they were allowed to remain open and work during the pandemic, while some sellers remained closed.

Separately, the residential construction sector recovered to levels from early in the year, near 1.5 million annualised rates, adding 18.8% in July for building permits and 22.6% for construction started.

This recovery was supported by the reduction of mortgage rates to historic lows. Consequently, the rate of standard 30-year contracts in July fell below 3%. The rapid recovery of the real estate market was also supported by stimulus programs, which led to higher incomes despite the jump in unemployment.

IT had the highest weight in the indices. The retail and housing sectors had been reliable indicators of economic cycles for years, however, now their signals are harder to read than before. Therefore, it would not be correct to assess the entire economy by individual names and sectors only.

Market participants should be reminded of the saying “as long as the music is playing, we have to get up and go dance” when buying shares, despite the historically overvalued stocks.

In light of the success for some sectors and the financial market as a whole, it becomes more of a dilemma how the Fed regards this situation. The minutes of the July meeting is expected to be published today, during which market participants will be looking for hints at the outcome of the September decision. On the agenda is the question of whether the Fed is considering reducing support. On the one hand, it would stop the slippage of the dollar, but on the other, it may quickly cool the markets.

The FxPro Analyst Team